Abstract
We develop a multi-dimensional local average lattice method in order to compute efficiently and accurately the price of multivariate contingent claims. The proposed method improves the accuracy of the standard lattice method by considering the local averages of option prices around each node at the final time, rather than the prices at the nodes. The average value smooths the oscillatory behavior of the lattice method, which leads to fast convergence of the option values. Numerical computations show that the proposed local average lattice method is more efficient than other lattice methods for a given level of accuracy.
| Original language | English |
|---|---|
| Pages (from-to) | 873-884 |
| Number of pages | 12 |
| Journal | Quantitative Finance |
| Volume | 13 |
| Issue number | 6 |
| DOIs | |
| Publication status | Published - 2013 |
Bibliographical note
Funding Information:Kim is supported by the Basic Science Research Program through the National Research Foundation of Korea (NRF) funded by the Ministry of Education, Science and Technology (2010-0012584). Moon is supported by a Korea Research Foundation grant funded by the Korean Government (MOEHRD, Basic Research Promotion Fund) (KRF-2008-531-C00016) and the Gachon University Research Fund of 2012.
Keywords
- American options
- Lattice method
- Local average
- Multi-asset option pricing
ASJC Scopus subject areas
- General Economics,Econometrics and Finance
- Finance